Happy Days Are Here Again, Aren't They?

Mark Carney would have us believe the recession is over even if recovery will be somewhat slow. However, look at what Mr. Carney said one year ago, two months before the global economy crashed:

The Canadian economy is judged to have moved into slight excess supply in the second quarter of 2008, and this excess supply is expected to increase through the balance of the year. High terms of trade, accommodative monetary policy, and a gradual recovery in the U.S. economy are expected to generate above-potential economic growth starting early next year. This will bring the economy back to full capacity around mid-2010.

On the other hand, here is a transcript of an interview with Nouriel Roubini, who foresaw the crash coming, on PBS's Nightly Business Report about what we might expect now:

PRATT: So what is your forecast for the recovery right now? I've been hearing sub par growth. What exactly does that mean?

ROUBINI: First of all, in my view the recession is going to continue through the end of the year. It's not over yet, and while potential growth rate for the U.S. economy is 3 percent, I expect that the growth rate of the economy is going to be very anemic, below trend, then on 1 percent for the next two years. Why? You have U.S. consumers are shopped out, saving less debt burden. They're not going to consume very much. Your financial system is severely damaged, and credit growth is going to be limited, and now we have also this massive re-leveraging of the public sector with a large budget deficit and increases in public debt are going to eventually crowd out the economic recovery of the private sector. So I don't see a lot of economic growth ahead of us.

PRATT: Are you worried at all about a double-dip recession?

ROUBINI: Yeah, the risk is that by the end of the next year, if budget deficit remains very large, around $1.5 trillion, and if the Fed keep on monetizing them, essentially printing money to try to prevent increases in interest rates, expect that the inflation is going to go up, and if expecting inflation were to go up, long-term government bond yields would go up, and mortgage rates will go up. Borrowing costs for consumers (INAUDIBLE) will go up, and that's going to crowd out the recovery, so there's even a risk of a double-dip recession.

This looks very much like the early nineties but perhaps worse. The political toll then included the defeat of the Bush I administration in the U.S. despite the political highs it achieved following victory in the 1991 Gulf War and the reduction of the Mulroney-Campbell PCs to 2 seats in 1993. The political toll substantially lagged the economic one but it was just as devastating when it appeared.

Did Joe Biden offer a prediction on the Canadian election?

Joe Biden acknowledged this past weekend that the Obama administration underestimated the depth of the recession. "We misread the economy", he told George Stephanopolous of ABC.

Polls in the past month or so in Canada have shown some strengthening on the part of the Conservatives. Frank Greaves of Ekos Research, which is doing weekly large sample IVR polls on party standings, sees this improvement as linked to the economy:

An increasing number of Canadians say they are already feeling more optimistic about the economy than they were three months ago, and they are naturally concentrated among the most prosperous. This could generate a drift of voters back to the Conservatives from the Liberals in this demographic even as working-class voters become more distressed and perhaps antagonistic to the Conservatives.

There was a rapid run-up in the markets from March until mid-June unsupported by the fundamentals (the economy has continued to decline) and this certainly led to a great deal of speculation about the economy turning the corner and headed upwards. Indeed so optimistic was Jim Flaherty that he thought it was time to think about ending the stimulus.

The positive impressions from media coverage of day after day of positive market news helped the Conservatives as Greaves points out. What then to make of an economy that may stagger for the rest of the year. Following the negative U.S. jobs report last week, Nouriel Roubini commented:

The June employment report suggests that the alleged ‘green shoots’ are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10 percent by later this summer, around August or September, and will be closer to 10.5 percent if not 11 percent by year-end. I expect the unemployment rate is going to peak at around 11 percent at some point in 2010, well above historical standards for even severe recessions.

If Roubini's prediction holds true the impact on Canada would produce a similar story. The political implications are clear. Assuming the government falls on a confidence vote in early autumn, the subsequent election would be certain to produce a change in government, most likely a Liberal minority and quite possibly one where the NDP would hold the balance of power.

Will Hudak Become Ontario's Premier?

Margaret Wente is a generally small 'c' conservative Globe columnist (remember her persistent denials about climate change earlier in this decade) so her perception of the neo-Harrisite party that just selected Tim Hudak as their leader as "a bunch of old white guys so lost in the woods they make Stephen Harper's crowd look enlightened", should be making the Tories nervous. Wente is also a Torontonian.

Memories are short. The big victory of the Harris Conservatives in 1995 included victory in a majority of the constituencies in what is now Toronto (they won most of Etobicoke and Scarborough plus ridings like Willowdale and Don Mills, even the downtown riding of St. George-St. David). Merely to recount this is to say how much the world has changed since then. The context that permitted Harris to be successful in 1995 is no longer around with one exception.

Mike Harris was elected at the end of a long economic downturn. The Ontario Liberals will be coming to the end of their second term in 2011 and the economy could still be quite weak. This would be a potential electoral asset for Hudak depending on many circumstances currently unknown.

A key difference is going to be strategic voting - not a factor in 1995. The election of Hudak is potentially a disaster for Andrea Horwath's Ontario NDP: many New Democrats will vote strategically to avoid a return to the Harris years. Numerous others will be receptive to Liberal messaging we will soon hear over and over again that attempts cement the impression of Margaret Wente in the minds of the Ontario electorate.

Many neocons here yearn for the Harris years the way Republicans yearn for Ronald Reagan - a return to a mythical glamourized past. A Hudak premiership will more than likely be comparable to the regime of George W. Bush, ideological to be sure, but ultimately a political disaster. However, Hudak may never make it that far.